Northern Trust Corporation — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; fourth-quarter data are identified separately where available. Northern Trust provides asset servicing, asset management, fiduciary and banking services through Corporate & Institutional Services (C&IS), Wealth Management, and Treasury and Other. Its business is substantially fee-based, with assets under custody and management influencing fees.
Financial performance and position
- Revenue and earnings: FY revenue was $4.33 billion, up 6% from $4.09 billion. Net income was $811.8 million, up 11%; diluted EPS was $3.32 versus $2.99. Income before taxes rose to $1.19 billion from $1.08 billion.
- Fee revenue: Trust, investment and other servicing fees increased 9% to $2.83 billion. Foreign-exchange trading income fell 14% to $210.1 million, attributed to lower currency volatility and client volumes. Money-market fund fee waivers were $129.8 million, versus $108.2 million.
- Interest income and margins: GAAP net interest income increased 8% to $1.01 billion; fully taxable equivalent (FTE) net interest income was $1.03 billion, up 7%. FTE net interest margin declined to 1.08% from 1.13%, as lower asset yields outweighed lower funding costs.
- Expenses and credit: Noninterest expense rose 5% to $3.14 billion, including $47.5 million of charges and write-offs. Provision for credit losses declined to $6.0 million from $20.0 million. Net charge-offs were $18.0 million; nonperforming assets fell to $232.3 million from $274.7 million.
- Client assets: Assets under custody increased 7% to $5.97 trillion and assets under management increased 6% to $934.1 billion. Management cited higher markets and new business.
- Balance sheet and funding: Year-end assets were $109.95 billion, deposits $90.76 billion, and stockholders’ equity $8.45 billion. Loans and leases totaled $31.64 billion, up 8%. Senior notes were $1.50 billion; long-term debt was $1.62 billion; other borrowings were $1.69 billion.
- Cash flow and liquidity: Operating cash flow was $936.0 million; investing cash flow was negative $8.21 billion, largely reflecting increased Federal Reserve deposits and securities purchases; financing cash flow was positive $7.07 billion, primarily from deposit growth and preferred-stock proceeds. Cash and due from banks ended at $3.05 billion. Management reported that cash, central-bank deposits, short-term money-market assets and investment securities together represented 64% of total assets. Parent-company liquidity was $869.4 million, down from $1.6 billion.
- Capital: The Corporation’s common equity Tier 1 ratio was 12.4% under the advanced approach and 12.5% under the standardized approach; total capital ratios were 15.0% and 15.5%, respectively. Ratios exceeded well-capitalized thresholds.
Material changes and fourth-quarter data
- Reported FY growth was led by servicing fees and net interest income; weaker foreign-exchange trading income and higher expenses partly offset those gains. Average earning assets grew 12%, while the FTE net interest margin continued to contract.
- C&IS net income increased 14% to $384.3 million; Wealth Management net income increased 3% to $389.2 million. Treasury and Other net income increased to $38.3 million from $17.2 million.
- In the fourth quarter, net income was $244.0 million and diluted EPS was $0.98, compared with $169.7 million and $0.70 in fourth-quarter 2013. The quarter included $9.5 million of preferred dividends.
- The Corporation issued Series C preferred stock in August for net proceeds of $388.5 million, repurchased 7.5 million common shares for $480.7 million during the year, and raised the quarterly common dividend to $0.33 per share.
Management commentary, outlook and risks
- Excluding $47.5 million of 2014 pre-tax charges and write-offs and including the related $9.5 million income-tax benefit, management reported adjusted net income of $833.6 million, diluted EPS of $3.41 and return on average common equity of 10.3%. Comparisons for 2013 were affected by a $32.6 million property-sale gain, a $19.2 million litigation charge and a $12.4 million fee-receivable write-off.
- The filing provides no formal numerical earnings or revenue guidance. The 2015 capital plan had been submitted to the Federal Reserve; the decision on proposed capital actions was expected in March 2015. Basel III and liquidity requirements were being phased in, including the U.S. liquidity coverage ratio requirements beginning in 2015.
- Key business risks include persistently low interest rates and money-market fee waivers, market-driven changes in client assets and transaction activity, foreign-exchange volatility, credit and counterparty risk, operational and cyber risk, and extensive evolving U.S. and international regulation.
- Legal matters include securities-lending lawsuits and an SEC subpoena concerning securities-lending activities. A French prosecutor recommended possible criminal charges against a subsidiary in connection with administration of two trusts; the decision whether to bring charges was pending. Management said no material accrual had been recorded for pending litigation or regulatory matters and estimated the upper end of reasonably possible losses for a limited set of matters at approximately $130 million; other matters could not be reasonably estimated.
- Auditors issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded disclosure controls and internal controls were effective at year-end.
Important facts for investors to verify
- Whether servicing-fee growth and client-asset inflows persist, and how much fee revenue remains exposed to market levels and waived money-market fees.
- Whether net interest margin stabilizes as rates and asset yields change; review the company’s rate-sensitivity disclosures and assumptions.
- Progress on the 2015 capital plan and regulatory liquidity requirements, alongside the parent company’s reduced liquidity and reliance on Bank dividends.
- Developments in securities-lending litigation and the SEC inquiry, the French matter, and whether reasonably possible losses or accruals change.
- Credit quality as loans grow, particularly residential and commercial real estate exposures, and the adequacy of the $295.9 million total allowance for credit losses.